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C.K. Pralahad passed away April 16, 2010, and while Pralahad may not have been a household name, for those of us in the business community, his passing ought to merit a great deal of attention because, for many of us, a great part of our careers and even lives have been impacted by this man.
In 1990 Pralahad and Gary Hamel wrote The Core Competence of the Corporation. This book became a virtual beacon for so many businesses in the subsequent years, introducing the term, "core competence". The concept of core competency is now well known. Like many terms that become commonplace, it is often wise to come back and review its meaning. Dictionary.com defines it as "a defined level of expertise that is essential or fundamental to a particular job; the primary area of expertise; specialty; the expertise that allows an organization or individual to beat its competitors."
This definition certainly cast many conversations and decisions in a new light. For instance, a defined level of expertise that is essential or fundamental implies that there should be clear ways to measure effectiveness. The final phrase, "the expertise that allows an organization or individual to beat its competitors," sets even higher criteria. A core competency is not, as many seem to believe, "something that is so important that we must do it ourselves." A core competency allows a company to win, rather than compete.
So, if the concept's been around for a while, and the phrase becomes so common that its meaning begins to slide, what does it matter? And more to the point, why is this important now? It is important now - again - still - because several factors have reemerged to form a confluence of challenges to everyone's "core competencies." What are these factors? Let's examine them:
1. Information technology and transparency
2. Increased competition
3. Economies of scale and scope
Information technology and transparency
Information technology is an enabler, and an equalizer. More than the phenomenon of flattening cited by Thomas Friedman in "The World Is Flat," technology makes virtually everything known to everyone. Consider the proliferation of information released to the eager public eye regarding celebrities, political figures and others unfortunate enough to attract the scrutiny of the ubiquitous and curious media. You Tube, Twitter and Facebook have eradicated many of the lines between public and private lives.
Equal amounts of information are generally available to others in the business world. Competitors are often exposed to the prices you quote, and can often estimate costs, especially for a public organization. Public or private, these subjects come up in a surprising number of conversations over which you have no control.
The proliferation of information about your business, your products, your services, your sales and marketing materials, is real and rampant. If your core competencies are founded upon knowledge that others can learn and apply, your organization is vulnerable and your customers are susceptible. Today's technology provides easy access to a previously unimaginable cross-section of data, and quick ways to disseminate it. Net result: there are very few secrets.
Increased competition is nothing new. Anywhere there is a promise of return on investment, others will surge towards the warmth, light and allure of profitability. What is new - and increasing - is the type of competition with which every business contends.
Consider the media. Years ago, the morning newspaper fought the evening newspaper for readers. Then, periodicals joined the fray, taking a share of the readership by distilling the news and publishing it weekly. Network television came, and became the preferred format for those who wanted only the highlights.
Then, came CNN, whose global 24/7 format promised the most current information for those who craved it. Others entered the market, only to be trumped by the internet. This medium splintered and spread an amazing variety of informational sources unto itself. Now, we can subscribe to news sources and have it emailed or texted to us instantaneously.
Think the media example is an anomaly - perhaps just a hyper-extension of the effects of information technology cited above? Think again. Write a list of your top ten competitors today, and compare it to the list of your top ten competitors of five or ten years ago. And, your company may be one of those to recently join someone's list. And, as you view your list, consider which you would define as your "traditional" competitors, and those which have slid or transitioned from other industries, or geographies, and now compete against you, offering competitive alternative services, viable substitute products, or "bundled" offerings that are capturing market share.
Economies of Scale and Scope
As companies specialize, they are often able to achieve a "per unit" cost advantage through efficiently processing high volumes. This advantage may be through the use of technology, or they may initiate a "virtuous cycle," reinforcing the initial advantage by developing technology to increase their advantage. In the small parcel industry, UPS serves as an example. Though others compete effectively against "Brown," their share of the market has allowed them to invest in ways to lower their costs and improve their returns. In turn, their competitive position is enhanced by the benefits of spreading their technology investment across their large customer base.
The same dynamic can often impact competition relative to geographic scope, and/or scope of services. In today's global economy with dynamic, extended supply chains, there is a continual need for on-site eyes, ears and expertise. Such expertise must be familiar with the customer's business, and have an understanding of local customs and culture, as well as national rules and regulations. Such expertise can be challenging to find, expensive to develop and difficult to retain. Obviously, those companies that can spread these costs across a broad spectrum of demand have an advantage.
Further, companies that are able to provide integrated services, and spread risk across a diversified revenue stream, can also benefit, when the services are complementary. When they are able to create additional efficiencies through streamlined processes such as single-data entry and visibility through integrated, seamless systems, the cost advantage is often increased. If you do not have scale and scope advantages, the signal is clear: consider outsourcing these responsibilities to someone who does.
The shifting sourcing strategies that impact so many supply chain decisions today are a strong example of the compensation and wage incentive factor. Companies and countries are able to take advantage of wage disparities as globalization provides access to these resources. To the extent that core competencies are founded upon, or reinforced by, pay policies and incentives, such competencies may be vulnerable to alternative compensation strategies.
For instance, many start-ups are able to lure top talent away from legacy organizations by offering an equity stake. Other organizations are able to attract skilled sales talent by offering higher commission structures in exchange for lower, fixed-cost salaries. It became clear during the economic turndown that companies which had variable costs were most resilient, and, ultimately, more successful.
Alternative compensation strategies can provide new cost structures. This can lead to lower price points, and can facilitate a competitor's grab for market share or a new entrant's move into your wheelhouse. Changing compensation strategies can be one of the most painful steps for organization, because it is often linked and rooted in the company's culture. However, competitive forces have no regard for the proud tradition of your organization's pay practices.
Shaken to the Core
As a result, many of the assumptions about "core competencies" have changed for most organizations. We have seen this recently in stronger momentum towards outsourcing. Companies are outsourcing for many reasons. Among the primary are:
1. The drive to deliver cost savings and achieve greater efficiencies.
2. Unavailability of expertise and/or unwillingness to add staff.
3. Lack of resources for IT investment, or systems enhancement.
4. Commitment to sustainability without in-house resources/knowledge.
5. Capability to take advantage of economic recovery without adding cost.
6. Risk mitigation/compliance across an extended supply chain.
Another, even stronger motivation is emerging. Companies are re-examining their assumptions about core competencies and making some startling realizations. First, all core competencies are subject to attack. Secondly, it is often detrimental and can be damaging to defend an activity which is more company legacy than a core competency. As a result, savvy organizations are determining what is their truly sustainable competitive value-add, and performing the due diligence necessary to find the best outsource solutions provider.
Source: C.H. Robinson
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